The objectives of cash and liquidity management are, at their core, relatively simple, and have remained so for decades: make sure the right cash is in the right place at the right time. That said, the introduction of the Basel III capital adequacy regime has resulted in the biggest shake-up within cash management for a generation, particularly with respect to banks’ relationships with their corporate clients.
For example, the required leverage ratios introduced by Basel III make certain types of lending (low-risk) less appealing to banks. They also require banks to classify different types of corporate deposits into short-term operational cash (for example, where required for payments and payrolls) and longer-term non-operational cash. Non-operational cash, according to the new regime, has to be backed by high-quality liquid assets that can be converted easily and quickly into cash in private markets in the event of a stress test, and the rates of return that banks offer to corporates may change to reflect this.
The result of Basel III’s changes is a banking industry forced to re-assess its relationships with its corporate clients, and corporations likewise having to re-think how they manage liquidity and working capital. Whether it’s the amount of business “owned” with the company or cash forecasts and flows, a number of variables are increasingly affecting the overall “value” of each bank-client relationship.
One might have expected prohibitive new regulations to have prompted banks to scale back certain operations, or perhaps turn away corporate funds. Yet many banks are now seeing possibilities – beyond or even because of Basel III. Driven by advances in data processing and analytics, they are providing their corporate clients with new, value-adding services, replacing lost interest with new fee income.
Looking at the various ways of monitoring client cash on their balance sheets is one such avenue. By helping their corporate clients invest their money in off-balance sheet investments; for example by providing automated sweeps of excess cash into money-market funds (MMFs), banks are providing more options than the simple calculation of whether to accept or turn away clients’ money. In this way they are taking a matter of compliance and turning it into a novel and commercially net-positive activity, by helping their corporate clients manage their cash and liquidity more effectively, but also increasing the “share of wallet” of corporate client business at the same time.
All well and good. But the industry landscape of liquidity and cash management has reached a level of complexity the likes of which have never been seen before. The intricate web of multiple currencies, countries and regulators; the need to accommodate country-specific permutations and global 24/7 operations; and the multitude of risk dimensions all mean that any new bank services must have cash and liquidity management solutions underpinning them. And they must offer a certain level of sophistication.
One key factor is flexibility, and the ease of customisation of any solution. Tailored to specific corporate requirements, solutions must be subject to change – whether to meet a new strategic objective, or to accommodate evolving regulations or new market dynamics.
Cash flow forecasting
One activity that will play a vital role in helping companies reorient themselves in the post-Basel III environment is the relatively mundane task of cashflow forecasting. Keeping tabs on where cash is at any given time enables it to be used more efficiently. Meanwhile, having a clear picture of cashflow allows the selection of the most attractive investment options. Additionally, overall, cash flow forecasting provides a flexible way for banks and corporates to differentiate between operational and investment cash.
To illustrate, companies may opt for longer-term deposit products to gain higher yields – and indeed this demand has been recognised by banks (which have gone on to offer notice accounts with notice periods in excess of 30 days to meet the Basel III requirements on cash outflows). However, to benefit from these products, a company must be able to ensure that it will not need that cash within the given notice period. This is where a cashflow forecasting solution comes into play.
To be effective it should enable cash to be segmented into defined, flexible liquidity or tenor buckets, so companies can predict what their cash positions will be on specific future dates. Unwanted surprises are avoided and it allows any necessary corrective actions to be taken in good time. Further integration with additional bank services to streamline these corrective actions – and aggregation of data from multiple systems – is then required.
Although it is not a new requirement, cashflow forecasting has always been a challenge for corporations and any new tools which address today’s challenges must be able to handle a high level of complexity. As the scope of cashflow forecasting widens, banks and corporates will need to work together closely to ensure success and avoid any financial, timeliness and delivery pitfalls that may await.
Another way corporate treasurers can maintain and/or maximise cashflow is through liquidity solutions. If the problem concerns managing short-term cash, there is a range of options available – including cash concentration, notional pooling, intercompany loans, and instant access savings accounts.
Minimising or offsetting banking fees is another way returns can be increased. To do this, organisations should consider a managed earnings credit rate (ECR) as one component of a balanced compensation programme, as it allows businesses to offset banking fees against their deposits.
A third option is the utilisation of sweep accounts, which invests (“sweeps”) excess money from an account, thereby enhancing an institution’s earnings potential. Sweep account investment options can be tailored to an institution’s needs, with some designed for companies seeking maximum return on investment, and others focused on providing maximum security or lowest risk exposure.
The successful deployment of any solution, however, will hinge on closely collaborative relationships between banks and corporates, making use of expertise wherever it is available. Banks should take responsibility by proactively staying on top of their corporate clients’ cashflow and liquidity issues, and any companies aiming to strengthen their position in the wake of global economic and regulatory changes should be leveraging their banks’ knowledge and specialist market understanding.
By building cash and liquidity strategies together in this way, both banks and corporations can be optimistic about navigating the “beyond Basel III” environment.
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